Amounts on Late-Filed S Corporation Return Were Not Disclosed on Taxpayer’s Return

For
purposes of determining whether there had been a substantial
understatement of gross income on a taxpayer’s return, the
IRS Office of Chief Counsel determined that amounts on a
Form 1120S, U.S. Income Tax Return for an S
Corporation, filed after the three-year statute of
limitation expired, were not considered to be disclosed on a
taxpayer’s Form 1040, U.S. Individual Income Tax
Return (Chief Counsel Advice 201333008).
Therefore, the amounts on the S corporation’s return should
be considered in calculating whether the extended Sec.
6501(e)(1)(A) six-year statute of limitation applied. The
six-year period applies when there is a substantial omission
of income equal to 25% or more of the gross income reported
on the return.

The taxpayer filed Form 1040 and
reported an amount as his distributive share of an S
corporation’s income on his return. When the S corporation
filed its return more than three years later, it revealed
that the taxpayer’s distributive share of the S
corporation’s income was actually more than 125% of the
amount reported on the original Form 1040. That larger
amount was enough to extend the statute of limitation from
three years to six years unless the amount on the late-filed
Form 1120S was considered to have been disclosed on the Form
1040 because the Form 1120S was referred to on the original
form.

The IRS concluded that the amount had not been
disclosed on the original return. When an individual’s
return contains a reference to other documents or returns,
it can, in some cases, serve as notice to the IRS sufficient
to be a disclosure. However, before a Form 1120S can be
incorporated by reference into a taxpayer’s return, the Form
1120S must exist and be in the IRS’s hands.

Here,
the Form 1120S was not filed until long after the Form 1040,
and therefore the IRS advised that it is treated the same as
an amended return, which does not count as a disclosure for
Sec. 6501(e) purposes. Under the normal return filing
deadlines, the Form 1120S is due one month before Form 1040
is due, and the IRS would have received the S corporation
return before it received the individual return. In that
situation, it would have had notice of the contents of the S
corporation’s return. (Of course, in that case, there would
have been no need to extend the statute beyond three
years.)

The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.D., and W. Eugene Seago, J.D., Ph.D., for their article, “Taxation of Worthless and Abandoned Partnership Interests.”

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